SIMPLISTICALLY, the world is divided into two economic philosophy and policy camps. There are the “Keynesians” who follow a 21st century version of the works of John Maynard Keynes. Then there are the “Austrians” who believe in the theories of the so-called Austrian School of economic thought.
The “Keynesians” embrace the idea that during times of economic stress, mainly recessions, it is beneficial in the short term for the government to stimulate the economy through whatever means necessary. This includes low interest rates to encourage borrowing and increased government spending through increased debt if necessary.
The “Austrians” believe that Keynesian practices will lead to assets price bubbles that will eventually burst, debt bubbles that will create hyperinflation, and bad investments that will distort future economic growth. The Austrian solution to recessions and the like is to allow the normal business cycle to work things out without too much government interference. Austrians would let the market decide interest rates and not the central banks.
The global economic system through the banks and the government have adopted Keynesian polices for the most part over the last 6 years. Even the most dedicated Keynesians can only say at best that things would have been much worse without government borrowing and stimulus. At best, economic growth in the US and Europe is increasing at a miserably slow rate. Unemployment in Europe is a disaster and in the US the number of people available for work that are actually employed is very low.
Median wages in the US are at the lowest level since 1998. Adjusted for inflation, Americans are earning less today than they did even as recently as 2012.
Keynesians who might have bet on a strong economic recovery has lost. However, Keynesians who put their money in the stock market have been huge winners. Your investment in an Exchange Trade Fund (ETF) that tracks the Morgan Stanley World index of markets in 23 developed countries has gone from $10,000 in July 2009 to its current $20,374. The ETF for the 21 nation Emerging Markets Index has also double in value since 2009.
Congratulations to the Keynesians you made a killing in the stock market. Of course if you are a Keynesian who works a real job, you’re making less money if you still have a job.
“Austrians” who bet on $3,000 per ounce gold, hyperinflation, or a collapse in the price of government bonds are big losers. And, in constant anticipation of the bubble breaking, they did not buy the stock markets. The only consolation at least from the Austrians I read, is that they are still right and they have more time to get ready for the global economic Armageddon.
In truth, both the Keynesians and the Austrians have spent many years being wrong. Global economic growth and particularly in the US and Europe is not happening. The stock market increase has benefited the wealthy by whatever way you measure it. The economic future still looks dim.
Global debt continues to rise with many European countries having a higher debt to economic output higher than in 2009. Japan has no economic growth and an unmanageable debt.
But the worst insult and slap to the face of both Keynesians and Austrians is an insignificant little country sitting on the edge of nowhere. Stable economic growth-check. Stable currency exchange rate-check. Low government, corporate and personal debt-check. Low government budget deficit-check. One of the best performing stock markets-check. Low and very manageable inflation-check.
The Philippine does not follow either the Keynesian or the Austrian economic ideas. While always subject (mainly by Filipinos) to intense criticism of how we do things here, the nations’ economic policy might be best called “Common Sense Economics”.
This philosophy includes: don’t spend too much, don’t borrow to spend, don’t buy what you can’t afford, and don’t spend on too many foolish things.
Another key component to Philippine economic theory is that government can rarely solve important problems. Filipinos have learned over at least 100 years that government often makes things worse, not better. And the moment you really depend on government, it usually fails.
In the last few years, no matter what the result from the global economic coin toss, it has been, “Heads, PHL wins; Tails, PHL still wins”.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.
3 comments
Great Article Sir!! 🙂
Another great read! Your making my day Mr. Mangun, always.
As always, master John. As always.